Construction on the Illinois State Toll Highway Authority's Tri-State Tollway.
The Illinois State Toll Highway Authority finished fifth among Midwestern borrowers, completing $1.5 billion of deals. Illinois Tollway

CHICAGO — Municipal bond issuance picked up steam last year in the Midwest, as issuers loosened the reins a bit on new money borrowing and refundings recorded double-digit gains thanks to favorable interest rates.

Midwest bond volume rose 6.9% from 2013 to $63.5 billion, according to Thomson Reuters data.

Third and fourth quarter borrowing fueled 2014's gains, helping the Midwest reverse the trend of 2013 when the region's issuance sank 18% from 2012 as rates rose in the third quarter of that year.

Issuance dropped 14.3% year-over-year in the first quarter of 2014, then 10.7% in the second quarter, but governments and not-for-profits flooded the market with deals in the second half.

The third quarter saw a 21.5% year-over-year gain followed by a 43.2% surge in the fourth when $19.5 billion of debt was sold, according to figures from Thomson Reuters.

The Midwest topped the national volume increase of just 0.7%. Midwest issuers sold $29.4 billion of new-money paper, for a gain of 5.5%, and refundings accounted for $22.6 billion for a 12.6% hike.

More borrowing in Michigan, led by deals tied to Detroit's bankruptcy exit sold through the Michigan Finance Authority, helped boost totals and heavy issuance from Chicago and the Illinois state government also contributed.

"The Midwest has been pretty tight with money as financial managers pulled back the reins on debt issuance" during the credit crisis and recession even with low interest costs available, said Richard Ciccarone, president of Merritt Research Services LLC. "Now they are easing up and are more comfortable; with the economic recovery continuing and rates still attractive debt is becoming more attractive."

The 5.5% gain on the new money front came after a 9% drop in 2013 while refundings took an even harder 2013 hit of 30%.

Issuers in 2014 borrowed more in fewer transactions, down to 3,639 from 4,050.

Borrowing could keep pace this year as the region, like the nation, focuses its attention on infrastructure needs, easing some of the stigma of borrowing in the generally conservative region, Ciccarone said.

Issuance across sectors was mixed with market participants citing transportation as a particular Midwest bright spot, with a 32.5% gain boosting volume to $7.8 billion.

A handful of states are weighing tax and fee hikes to bolster transportation amid dwindling federal help and stagnant gasoline tax revenues. The sector could remain strong this year as several states weigh funding proposals that include bonds.

Education-related bonding topped the sectors with $17.8 billion of debt, basically flat compared to 2013. General purpose borrowing followed with $10.8 billion sold for a 15.9% drop; the utility sector saw a 68.7% jump to $7.7 billion.

Healthcare volume declined 14.4% to $7.5 billion, mirroring a national trend that saw a 16% year-over-year drop in 2014, according to HFA Partners, a health care advisory firm. Hospitals continued to delay capital projects - especially major projects — amid the implementation of the new federal health care law, the firm said.

"For 2015, we're not expecting much of an improvement," HFA Partners managing director and co-founder Pierre Bogacz said in an email. "We believe most of the refundings have already been done and regarding new money, although we're seeing a few large capital projects lined up to go in the bond markets in 2015, most hospitals in the BBB and A category are holding off on non-essential projects or funding with bank debt (taxable or tax-exempt)."

The trend of private placements or direct loans placed directly with banks instead of in the public debt market is likely to continue, he said.

"Seems that banks have not lost their appetite and the small par amounts and useful life are a good fit for bank maturities," Bogacz said.

The Midwest's largest health care deal came from Royal Oak Hospital Finance Authority, which floated $437 million of refunding bonds in the spring on behalf of the William Beaumont Hospital. Now named Beaumont Health, the provider later in 2014 became the latest provider to jump into the merger trend when it joined with three other Michigan hospitals to create the largest system in southeast Michigan.

While Chicago and Illinois both were frequent borrowers in 2014, overall issuance from Illinois dropped 2.1% to $13 billion. Ohio issuers borrowed $11.1 billion, down 3.4%.

Bonding by Minnesota borrowers rose 44.5% to $7 billion and Missouri issuance jumped 23.1% to $6.8 billion. Indiana issued 11.9% less for volume of $4.4 billion while Nebraska issuance surged by 52.5% to $3.2 billion.

Borrowers stuck with fixed-rate structures which accounted for almost 95% of the region's volume. Bond insurance gained more ground with coverage provided on 225 issues valued at $3.5 billion, up by nearly 160% over 2013 but still only 5.4% of the region's volume.

Bonds backed by revenues accounted for $37.9 billion of the region's issuance while paper defined as general obligation accounted for $25.7 billion, according to Thomson Reuters.

Michigan issuance jumped 54.3% to $9.2 billion.

The Michigan Finance Authority was the largest issuer by volume, driven by deals done as part of Detroit's exit from bankruptcy.

The MFA in August floated two deals that totaled $1.8 billion, marking the region's second and sixth largest deals of 2014. The financings were part of a controversial restructuring of Detroit's $5.2 billion water and sewer bond portfolio. Hammered out in the city's bankruptcy case over the summer, the deal settled a dispute between bondholders and the bankrupt city by allowing bondholders to tender their bonds and the MFA to issue restructured debt.

The transaction was considered a default by Municipal Market Analytics and market participants, though not the ratings agencies.

The tender and restructuring deal was "likely the optimal solution for the market" and avoided setting a legal precedent for special revenue bonds in a Chapter 9, MMA said. But it was still considered a default because bondholders got less than par and the exchange came after Detroit threatened greater impairment. Citi led the deals.

The top single deal from the region came from Illinois which sold $1 billion in February 2014; the third biggest deal came from the Missouri Highways and Transportation Commission which refunded $900 million in May; Minnesota had the fourth biggest deal with an $895 million issue in August, followed by Chicago with its $883 million new money and refunding GO issue in March.

Bolstering the utility sector, Ohio-based American Municipal Power Inc. in December sold $643 million of bonds to restructure debt related to the controversial Prairie State Energy campus in Illinois, the region's ninth-largest deal.

AMP is the largest public owner of the bond-financed project. The issuer refunded debt from 2008 and 2009 related to $1.7 billion of debt tied to its ownership of the project. Higher-than-expected costs for power generated at the campus have angered some cities and municipal utilities that obtain power from Prairie State, and the restructuring is aimed at easing the rate pressures. RBC Capital Markets led the deal.

Chicago followed the MFA as the top borrower in the region with a series of general obligation and revenue-backed deals that raised new money for projects and refunding debt for savings and restructuring purposes. The city issued a total of $2.6 billion of debt. Illinois followed with $2.4 billion of bonds in a series of new-money and refunding bonds.

Illinois' debt issuance this year could taper off as it moves into the final phases of a $31 billion capital program. Lawmakers and rookie Gov. Bruce Rauner want a new capital program but resolving a budget deficit is first on their agenda.

The Illinois State Toll Highway Authority finished fifth among Midwestern borrowers, completing $1.5 billion of deals. Its borrowing levels are expected to remain high as it continues raising capital for an ongoing $12 billion program.

Citi captured the top spot among senior managers in the Midwest, credited by Thomson Reuters with $5.9 billion of deal volume, followed by Bank of America Merrill Lynch with $5.8 billion, Morgan Stanley with $5 billion, RBC Capital Markets with $4.7 billion, and JPMorgan with $4.3 billion.

Public Financial Management Inc. was the clear leader among financial advisors in the region, credited with transactions valued at $8.2 billion. First Southwest finished off the year in second place advising on $2.7 billion of sales. Acacia Financial Group Inc. was third advising on $2.3 billion, Stauder Barch & Associates finished fourth with $2 billion, and Public Resources Advisory Group came in fifth advising on nearly $2 billion.

Chicago-based Chapman and Cutler LLP took the top spot among bond counsel, credited with nearly $6 billion of the region's financings. It was followed by Missouri-based Gilmore & Bell PC with $4.2 billion. Kutak Rock LLP followed with $4.1 billion, Dickinson Wright with $3 billion, and Dinsmore & Shohl with $2.9 billion.

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